Smart Pricing is Key!

When I meet with prospective home buyers, one of their first questions is inevitably, “How low below the asking price should I expect to pay?” My answer is always the same… it depends! Some homes are priced fairly and others are grossly overpriced. I cannot recommend a generalized strategy as we need to weigh the merits of each home individually against their prices.

When my team and I work with a seller to list their home, our strategy is to determine the home’s approximate market value, and then offer it for sale for as close as possible to (or even slightly below) that number. This strategy is especially important in a declining market. If we were to tack on an extra 10% of “wiggle room” onto our asking price, and then the market dropped 5%, we would be 15% above the market.  The larger the gap between market value and asking price, the greater the chance that the right buyers will not see your home. Rather, buyers in the market for a more expensive home will see yours, and it will pale in comparison to the competition. The most effective strategy is to price slightly below the market so your home is the “best in its class.”

How We Determine a Home’s Value

When evaluating a home’s market value, we consider the following factors:

1. Availability and pricing of similar properties – Is the home unique or are there many like it for sale? If there are others for sale, how do they compare? What would it cost to get those homes to the same condition as yours, and vice versa?

2. Condition – Unless it is a very unique property, buyers in today’s market will discount the value of a home that requires more than simple cosmetic work. On the other hand, a home that offers popular amenities and is tastefully decorated will stand out among the competition.

3. Utility of Floor Plan – When we value a property, we look at the utility of the floor plan. For example, a three bedroom house with two bedrooms on the second floor and the third in the lower level would appeal to fewer people than a three bedroom house with all three bedrooms upstairs. A deck can be a plus, but less so if it is only accessible by walking through the master bedroom. Also, a kitchen with a large pantry would have more appeal than a kitchen with minimal storage.

4. Location – This used to be the single most critical criteria in evaluating home values, but as our city grew and neighborhood boundaries blurred with new development popping up all over, buyers were more willing to sacrifice location for value. Still, there are certain factors (like being near an El track, a bar, or on a busy street) that will negatively impact market value. Likewise, certain locations still command a premium.

There are some factors that are irrelevant to market value. They include:

1. How much you paid when you bought the property

2. How much you spent improving the property

3. How much you owe against the property (mortgages and/or equity lines)

4. The amount you hope or need to get from the property’s sale

Why Testing the Waters Doesn’t Work

Sometimes sellers ask if we can just “test the market” at a price that we both know is above their home’s market value. There are several reasons why this is a bad idea including the following:

1. Your home gets the most visibility the first time you list – and you only get one first time. There are buyers out in the market who have seen everything else, and they are waiting for “the right” home to come on the market. If your home is overpriced, those buyers are less likely to see it, and they may not be around to take a second look after you reduce your price.

2. Based on my experience, the longer your home is on the market for sale, the less negotiating leverage you have. Buyers will discount your asking price (even if it has been adjusted) if there is a lengthy market time, as it is their “proof” that the home is overpriced.

3. You may ultimately get less when you sell, than if you had priced it correctly in the beginning. We have seen sellers put their homes on the market with ambitious prices, receive offers, and turn them down because they were to low relative to their asking price. Subsequently, the offers stopped coming, the prices have been reduced to below what the sellers previously turned down, and they are still carrying the property. This is a slippery slope to be avoided.

4. Selling it is only half the battle. Once under contract, your home needs to appraise for the price on the contract, or the buyer will have to put more money down toward the purchase. Even if we are lucky enough to get someone to pay an over market price, there is a good chance the sale will fall apart or the buyer will renegotiate price when they receive their appraisal.

Why the Right Agent Can Mean the Right Price

So, how does your real estate agent evaluate competing inventory, condition, utility of floor plan and neighborhood? In smaller communities, agents can be familiar with each home that is available or sold recently because the total scope is manageable. But, in the City of Chicago where I sell homes, there are thousands of properties on the market at any given time. It is impossible to have physically inspected every home. So, we rely on our experience and on the information and photos found in our Multiple Listing Service (MLS). Sometimes we also reach out to agents who have sold similar properties and ask them for help so we can make an accurate comparison.

Note that while past and current sales data is available in the MLS, not every agent will interpret it the same way. The “lens” through which we see sales data will be colored by our overall experience, as well as by our level of expertise in the property type, in the price range, in our knowledge of the neighborhood, and our overall outlook. For example, an agent who is an expert at valuing luxury Gold Coast high rise condos may not be qualified to value a courtyard style vintage condo conversion in Lincoln Square. So, in searching for an agent to sell your home, be sure to ask for a list of properties these agents have sold in the last two years, and verify that they have related experience.

Final Notes

It is critical to understand that while we have the tools to help you estimate market value, it is only a momentary assessment. Pricing in this market is highly volatile. We will put a home on the market based on our estimate of value, but the following week the family who lives in the same apartment two floors above you may decide to put their home on the market at a price that is $50,000 below yours. Assuming the condition is equal, the value of your home will drop by at least $50,000, perhaps more, because your home is on a lower floor. You need to work with your agent to continually monitor the market once you have listed your home to make sure your pricing is still competitive. If not, immediately adjust in an increment that will allow you to reach a new audience (at least 5%).

The good news is that in the Chicago market there are still plenty of buyers. If your home is in good condition, priced at or below its current market value, and there are not too many like it for sale, you should get showings and even offers.

For more information about the market value of your home, feel free to call me at (312) 440-7525 or email jenny@jenniferames.com.


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Comments

  • Spot on… most of what you say could apply anywhere in the country… accurate pricing from the get go is essential.

  • SeanCarp

    Jenny – A fabulous post from “both sides of the aisle.” Great advice here for buyers. sellers, agents and innocent bystanders.

    I will be forwarding a link to my Rookies suggesting that they add this article to their “must read” files.

    Nice job!

  • Great blog! This indeed applies to any city in any state. The “Testing The Waters Game” is far too prevalent in San Diego. As are the ridiculous price ranges that agents post for one property (i.e. $209,000 – $365,000).

  • Great blog! This indeed applies to any city in any state. The “Testing The Waters Game” is far too prevalent in San Diego. As are the ridiculous price ranges that agents post for one property (i.e. $209,000 – $365,000).